Taxation, Migration, and Innovation: The Effect of Taxes

Moretti & Wilson Taxation, Migration, and Innovation

Taxation, Migration, and Innovation: The Effect of Taxes on the Location of Star Scientists?

Enrico Moretti(UC Berkeley)Daniel Wilson

(Federal Reserve Bank of San Francisco)

Preliminary

IZA, 31 May 2014

*The views expressed in this paper are those of the authors should not be attributed to the Federal Reserve Bank of San Francisco or the Federal Reserve System.


• How sensitive are people and businesses to taxes?

• When jurisdictions raise tax rates, do they push taxpayers to move away?

• By cutting taxes, can jurisdictions pull in “economically valuable” taxpayers – those who generate either fiscal or social rents

Introduction


• Much debate about tax-induced migration

• For example, Gerard Depardieu moves to Russia after France enacts 75% income tax rate on high-wealth residents

Introduction


• Recent literature on tax-induced migration has focused on particular segments of population:

– Young & Varner (2011) and Varner & Young (2012) look at “millionaires taxes” and high-income migration (in California and New Jersey)• Found little evidence of tax-induced migration

– Kleven, Landais, & Saez (2013) look at within-E.U. mobility of star football players in response to tax changes• Found strong evidence of tax-induced migration

• Large literature on non-tax determinants of migration

– Kennan & Walker’s (2011) estimate dynamic structural location choice model

– Gabriel, Shack-Marquez, and Wascher (1993) estimate state-pair level cross-sectional model of pairwise migration as function of pairwise unemployment rate differentials.

Introduction


• Surprisingly little research on tax-induced mobility of “economically valuable” individuals

– Jurisdictions have strong interest in attracting individuals and businesses who generate positive economic spillovers (fiscal or social)

Introduction


• This paper estimates tax-induced mobility of star scientists…– Surprisingly little research on tax-induced mobility of

“economically valuable” individuals

– Star scientists thought to have large positive local spillovers (Jaffe, Henderson, and Trajtenberg 2005)

• …in context of U.S. states– Using data on state-to-state migration of (all) star scientists in U.S.

– Compute bilateral migration rates for every pair of states (50x50)

– Identify tax effects on migration rates from within state-pair, over-time variation in pairwise tax rate differentials

Introduction


• Introduction

• Data

• Some Stylized Facts

• Theoretical Framework – Model of Location Choice

• Estimation Results

• Conclusion

Outline


We address these questions with rich compilation of data

1. Universe of U.S. patents from 1977-2010– Identify prolific (“star”) patenters

– Identify state of residence and state-to-state moves

– Identify important characteristics of scientists such as corporate status of employer

– Compute annual bilateral migration flows between pairs of states

2. Individual Income Tax Rates by Income Level, by State– NBER TaxSim– World Top Income Database (Alvaredo, Atkinson, Piketty, & Saez, 2013)

3. Corporate Income Tax Rates, R&D Credit Rates, and Investment Credit Rates, by State– Chirinko & Wilson (2008), Wilson (2009)

Data


Basic Facts about Star Scientists

1. Define stars as scientists in top 5% of patent count over prior 10 years– 290,000 observations over 83,000 scientists

(conditional on observing state in both year t and t+1)

2. Mobility– About 4% of (top 5th) star-scientist*year observations exhibit a move

– About 6% of stars move at least once

– Average moves per star: 0.33

– Average moves per star, conditional on moving at least once: 2.6

– Not a lot of movers, but movers move a lot

Some Stylized Facts

Bilateral Flows of Stars (2006)

– CA accounts 1/3 of bilateral flows over 4 (or 20% of all flows)

– High-tax CA is net exporter to low-tax WA. Yet CA is net importer from low-tax TX


Cross-State Variation in Taxes

9.55

0

8.5

0

010.48 0

0

0

0

0

(7.9,11](6.5,7.9](5.5,6.5](4.4,5.5](0,4.4][-1,0]

Marginal Tax Rate, 2010

Individual Income Tax Rate for household making $365,026 (99th percentile) in 2010

1977-1983 1983-1989

1989-1995 1995-2000

(1,6](0,1](-.001,0](-1,-.001][-6,-1]

2000-2005 2005-2010

Notes: Categories are identical across maps. White indicates no change.

Change in Individual Income Marginal Tax Rate at 99th Percentile


• Objective: Derive regression eqn at state-pair*year level

• Random Utility Model:

where captures salience of policy in d relative to o

• Define Probability of Moving from state o to state d:

• Assuming Independence of Irrelevant Alternatives (McFadden 1978):

Theoretical Framework


Aggregate over i to state-pair*year level (level of tax variation), measuring by observed bilateral migration rate.

implies odds-ratio :

and log odds-ratio :

Theoretical Framework


• Under perfect information/salience, s = 1, and equation reduces to single regressor :

destination – origin net-of-tax rate differential

• For tax credits, -τ = c • Regression accounts for state “pair” and year fixed effects

– Controls for amenities/characteristics of different states

• Cluster by state-pair

• Coefficients are reduced-form functions of (unobserved) labor supply and labor demand elasticities

Estimating Equation

-.2-.1

0.1

.2.3

-.04 -.02 0 .02 .04Top Indiv. MTR

-.3-.2

-.10

.1.2

-.03 -.02 -.01 0 .01 .02Top Corp. MTR

-.3-.2

-.10

.1.2

-.04 -.02 0 .02 .04Investment Credit Rate*(-1)

-.2-.1

0.1

.2.3

-.04 -.02 0 .02 .04Top Indiv. MTR

-.2-.1

0.1

.2

-.03 -.02 -.01 0 .01 .02Top Corp. MTR

-.3-.2

-.10

.1.2

-.04 -.02 0 .02 .04Investment Credit Rate*(-1)

Notes: Points represent averages of x and y within quantile bins.All variables demeaned of their state-pair and year means.

Out-migration Vs. Tax Rates (Net of State-Pair & Year Fixed Effects)Origin State Tax/Credit

Destination State Tax/Credit

Graphical EvidenceLo

g O

dds-

Ratio

Log

Odd

s-Ra

tio


Baseline Regression Results

• Higher Destination-Origin Net-of-Tax Differential → Higher Origin-to-Destination Migration


Individual Income MTR, Top-End vs. Median

• Only High-Income Net-of-Tax Rate Matters for Star Scientists


Corporate Income MTR, Corp vs. Non-corp

• Corporate Tax Matters for corporate stars, but not for non-corporate stars


Dynamic Specifications: Effect seen at t+1 or t+2






Asymmetric Effects of Origin vs. Destination

• For taxes (Indiv. and corp.), origin more salient; for credits, destination more salient


Baseline results robust to:

• Alternative Definitions of Stars: Top 10%, Top 1%

• Alternative Patent Database applying disambiguation algorithm to scientist names (Li, et al. 2014)

• Weighting observations by (origin) state population

• Cluster by destination*year & origin*year

• Dropping post-2006 observations

Robustness


• Taxes (& Credits) Matter– Both Personal Taxes and Business Taxes

– Both Taxes and Credits: Investment Credits and R&D Credits

• Tax Progressivity Matters– Star scientists very sensitive to marginal tax rate on high income,

insensitive to marginal tax rate on median income.

• Corporate Taxes Only Matter for Corporations– Migration of star scientists who work for corporations is sensitive to

corporate income tax

– migration of non-corporate scientists insensitive to corporate income tax

• Push vs Pull– For taxes, push (origin tax) effect is bigger than pull (destination tax)

effect

– For credits, pull effect is bigger

Conclusion


• Estimate tax elasticity separately for stars who:– Switch employers vs. stay with same employer (between t

and t+1 )– Multi- vs. single-state firms

• Full Logit estimation of destination choice– Interact taxes with individual characteristics (scientific field,

productivity/patent-count, distance, etc.)

Still To Come


Extra Slides


Robustness


Alternative Tax Variables

020

0040

0060

00N

umbe

r of S

tars

Mov

ing

from

Orig

in to

Des

tinat

ion

-.2 -.1 0 .1 .2CIT(Destination) - CIT(Origin)

Distribution of Interstate Moves by Interstate Corp. Tax Differential

More Moves from High-Tax to Low-Tax States than Vice-Versa

05

1015

Den

sity

of S

tars

Mov

ing

from

Orig

in to

Des

tinat

ion

-.1 0 .1CIT(Destination) - CIT(Origin)

Corporate Stars (red) vs. Non-Corp. Stars (blue)

010

0020

0030

0040

0050

00N

umbe

r of S

tars

Mov

ing

from

Orig

in to

Des

tinat

ion

-.2 -.1 0 .1 .2MTR99(Destination) - MTR99(Origin)

Distribution of Interstate Moves by Interstate MTR99 Differential

But for Individual Income MTR, distribution is symmetric

Documents

Taxation, Migration, and Innovation: The Effect of Taxes